Summit Paintball Supply manufactures paintballs used by recreational gamers. The

Question

Summit Paintball Supply manufactures paintballs used by recreational gamers. The cost of producing a box of 2,500 paintballs is as follows: Direct materials $    12.50 Direct labor          6.25 Variable factory overhead        18.75 Fixed factory overhead        25.00 Variable selling, general, and administrative costs        18.75 Fixed selling, general, and administrative costs          4.00 The fixed factory overhead and fixed SG&A cost is allocated based on an assumption that the business will produce 400,000 boxes of paintballs per year. The company has capacity to produce 500,000 boxes without impacting either category of fixed cost. (a) The market for paintballs has become very competitive. Management has requested to know the break-even price that can be charged for a box of paintballs, assuming production and sale of 400,000 boxes. (b) Management has received a special order request for 100,000 boxes of "private label" paintballs. The order specifies a per box price of $75. How will profitability be impacted if the order is accepted? Summit Paintball Supply manufactures paintballs used by recreational gamers. The cost of producing a box of 2,500 paintballs is as follows: Direct materials $    12.50 Direct labor          6.25 Variable factory overhead        18.75 Fixed factory overhead        25.00 Variable selling, general, and administrative costs        18.75 Fixed selling, general, and administrative costs          4.00 The fixed factory overhead and fixed SG&A cost is allocated based on an assumption that the business will produce 400,000 boxes of paintballs per year. The company has capacity to produce 500,000 boxes without impacting either category of fixed cost. (a) The market for paintballs has become very competitive. Management has requested to know the break-even price that can be charged for a box of paintballs, assuming production and sale of 400,000 boxes. (b) Management has received a special order request for 100,000 boxes of "private label" paintballs. The order specifies a per box price of $75. How will profitability be impacted if the order is accepted?

Explanation / Answer

Statement showing computations Particulars Amount Variable Cost per unit: Direct Materials                     12.50 Direct Labour                       6.25 Variable Factory Overhead                     18.75 Variable selling, general, and administrative costs                     18.75 Total Variable Costs per unit                     56.25 Fixed FactoryOverhead = 400,000*25    10,000,000.00 Fixed selling, general, and administrative costs = 400,000*4      1,600,000.00 Total Fixed costs    11,600,000.00 Now contribution per Box required= 11,600,000/400,000                     29.00 Selling price per box = 29 + 56.25                     85.25 Since company can produce 500,000 Boxes therefore 100,000 units can be produced without incurring fixed cost Price = 75*100,000      7,500,000.00 Variable cost = 56.25*100,000      5,625,000.00 Profitability of special order      1,875,000.00

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